Economic Analysis of the German Economy

Current State of the EconomyGermany, despite having the largest economy in Europe and fifth largest in the world, has begun to feel the effects of the worldwide economic downturn and debt crisis in Europe. Economists have even begun to predict stunted growth in the incoming year. A council of economic advisors was established in the country in 1963. The council has forecasted the inability to grow in 2013 because of the anticipated continuation of decline in exports. This decline has been attributed to the debt crisis in greater Europe. They have predicted, however, that unemployment rates will remain relatively stable, at under 7%. In this paper, we will go in depth into some of the main factors affecting the German economy. We will show how the country has been doing in the past, how it is currently performing and will also do a quick forecast of what we think the future of the German economy looks like. After World War II, the economy in Germany underwent a drastic transformation. The policies and changes that were implemented at that time were in an effort to rid the country of its negative reputation and rebuild international trade relations. A change in the national currency, worker rights, and regulations all led to the eventual improvement in economic performance. The focus was placed on removing the government or state’s stronghold on the market and economic evolution. Germany more recently underwent other forms of reform in the aspect of labor. In 2003, moderation in wage inflation and formation of stronger ties with unions secured trust of workers in the labor force. These reforms allowed the unemployment rate in Germany to remain relatively low when it began increasing in other countries. The workforce in Germany works less hours on average than their counterparts in other countries, but remains just as productive and loyal because of improved labor conditions. Since Germany has the strongest economy out of all the countries in the EU, converting their currency to the euro actually meant adopting a weaker currency than their previous national currency. This led to an increase in exports which because German products became cheaper to purchase. Germany is, as a result, the second largest exporter in the world. Germany’s fiscal actions and decisions have aided them in avoiding the debt crisis that the other European countries are now undergoing. This has been attributed to the cultural stigma on spending outside of one’s means. Having the Euro as its official currency, Germany abides by the monetary policies of the European Central Bank. With the growing debt crisis, the European Central Bank has taken an expansionary approach to assist weaker states and to control inflation.

As displayed in the graph above, Germany experienced a decline in GDP in 2009, however returned to a growth pattern for the following two years. The 2009 downturn was caused by the decline in exports to their major buyers in Europe; however, expanding exports outside of their neighboring countries saw an improvement in business. Demand for goods within the country also played a part in the recovery. Gross Domestic Product (GDP)

Since the recession of 2008-2009, the German economy has seen a slow but consistent recovery. Recently their rebound has lost momentum, but the country has still shown moderate growth. A steep decline in nominal GDP was seen from 2008 to 2009, initiating the German depression. Nominal GDP declined from $3,615.9 (bil.) in 2008 to $3,297.5 (bil.) in 2009, a change of -9.7%. An increase or decrease in GDP year to year may be caused by: the price of goods and services increasing or decreasing with quantities held constant, the quantities of goods increasing or decreasing with prices held constant, or the increase or decrease of both quantities and prices. These factors can contribute to differing results regarding nominal and real GDP....

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GDP (purchasing power parity) $3.194 trillion (2012 est.)
GDP (official exchange rate) $3.367 trillion (2012 est.)
GDP - real growth rate 0.9% (2012 est.)
GDP - per capita (PPP) $39,100 (2012 est.)
Unemployment rate 6.5% (2012 est.)
Unemployment, youth ages 15-24
Total: 11% male: 12% female: 9.8% (2009)
Exchange rates Euros (EUR) per US dollar - 0.7838 (2012 est.)
Interest Rate 0.75 %
(The World Factbook, 2012) Note: data is in 2012 US dollars
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Fluctuations of national income around its trend value that follow a more or less wavelike pattern refer to the business cycle (Ragan, 2011 p. 477). Germany remains in the recessionary phase of the business cycle, but gradual improvement of the export and consumer sectors may be setting the stage for recovery (Hofschire, 2013). Although unemployment rates for both older and younger workers in Germany are now lower than they were when the United States slipped into a recession at the end of 2007, they are still not at full employment...

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Germany suffered major economic setbacks after their defeat in two world wars. After World War I and II, under strong political leadership and allied aid, the German state was able to rebuild itself and become one of the leading economies in the world. The German government played an important role in the rejuvenation of the economy so the German state and the economic system are closely intertwined. The relationship between state and market in Germany is known as the social market economy. Germany’s social market economy defied expectations and by the 1960s it was the envied by most of the world. The success of the Germaneconomy is due to government intervention in the market. The unique aspects of the Germaneconomy that has allowed it to flourish time and time again is because “the relationship between state and market is neither free market nor state dominant”1 and the Germaneconomy combines capitalism with social welfare programs aimed to provide economic or social assistance for its citizens.
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